Small-cap mutual funds are an unique investment avenue focusing on companies with market capitalizations below Rs. 5,000 crore. Typically speaking, these firms are ranked below 250 on both stock exchanges; NSE and BSE. For investors with a long-term horizon and higher risk capability, small-cap funds offer a great potential for growth.
But investing in small-cap funds doesn’t come without risks. The performance of these funds are quite volatile, and the companies they invest in can experience sudden market fluctuations. But before getting into the specifics of the best small cap mutual funds to invest in, it’s imperative to get familiar with the risks associated.
Why Invest in Small-Cap Mutual Funds?
Here is why you should add small-cap mutual funds to your investment portfolio:
1. Diversification Options
Small cap mutual funds offer diversification across various sectors that are often not always available with large-cap or mid-cap funds. They also assist in reducing your overall risk by spreading out your assets across different market segments.
2. Potential for Growth
Small-cap companies are typically nascent ventures with novel products or services. By being highly volatile, these firms may experience huge growth over long periods of time, which makes them an attractive investment option for those who want to ride on the waves of emerging market leaders.
3. Growth Potential
Small-cap corporations are generally small emerging businesses with breakthrough offerings. Though volatile, they can exhibit exponential growth over a long period and, hence, are invested in by people who wish to invest in the future market leaders.
4. Value Discovery
These funds typically identify underpriced stocks with excellent potential for growth. By investing in small-cap mutual funds, you invest in companies that the great investors overlook but hold strong potentials toward good future returns.
5. Building Long-Term Wealth
With a horizon of 5 to 10 years, investing in the best small cap mutual funds can harness the power of compounding for long-term goals. Whether you are building a robust portfolio or just planning for retirement, these funds may help you meet your objectives.
Key Considerations Before Investing
Investing in small cap mutual funds requires careful consideration of certain factors, including:
1. Risk Tolerance
The funds are more volatile as these companies tend to fluctuate sharply in the market. Invest only if you’re able to put up with potential downturns.
2. Research and Selection
Small-cap funds vary hugely in terms of performance. Opt for a fund having a stable track record, competent management, and supports a transparent investment strategy.
3. Balanced Asset Allocation
Do not put all eggs in one basket. Small-cap mutual funds should comprise only a percentage of your investment portfolio, balanced with big-cap and mid-cap funds to lower the overall risk.
Top Small-Cap Mutual Funds in 2024
While small-cap mutual funds have enormous potential, choosing the right fund is an important thing to do. Below is a table of some of the best small cap mutual funds you can consider:
| Fund Name | AUM (Rs. in crore) | Minimum Investment (Rs.) | 3-year CAGR (%) | 5-year CAGR (%) |
| Quant Small Cap Fund Direct Plan Growth | 3,578 | 5,000 | 64.73 | 24.09 |
| Axis Small Cap Fund Direct Plan Growth | 11,601 | 500 | 35.88 | 19.52 |
| Nippon India Small Cap Fund Direct Growth | 24,490 | 5,000 | 46.83 | 16.77 |
| Kotak Small Cap Fund Direct Growth | 8,672 | 500 | 42.95 | 16.61 |
| SBI Small Cap Fund Direct Plan Growth | 15,590 | 500 | 37.12 | 15.33 |
SIP as a Smart Investment Strategy
One of the most efficient ways to invest in small-cap mutual funds is through SIP. You pay a fixed amount at regular time intervals and thus average your investment cost over time, reducing some risk involved with market volatility.
In fact, as per a recent report by FIDC India, the net inflows of small-cap funds stood at an impressive Rs. 40,189 crore in 2023-24, highlighting their growing popularity among investors.
Additionally, for estimating the potential returns from these funds, one can use a SIP calculator online like the one provided by AngelOne helping investment get an estimate of the future value of their investment, as per factors such as investment amount, tenure, and expected rate of return. This way, you can plan your investments more effectively and stay on track to meet your financial goals.
Conclusion
Investing in the best small cap mutual funds provide high growth opportunities to risk-taking investors willing to invest for a longer period. Even though small-cap funds accompany market volatility, the potential for significant returns render them a suitable choice for investors looking for a long term-investment.
